STATE FARM FIRE & CASUALTY CO. v. MABRY, ET AL.

OPINION BY JUSTICE
ELIZABETH B. LACY
FROM THE CIRCUIT COURT OF THE CITY OF RICHMOND

James B. Wilkinson,
Judge
Present: All the Justices

In this appeal, we
consider whether the trial court properly determined that an
insurer was estopped from litigating whether its insured's acts
were negligent or intentional based on a judgment in a prior tort
action in which the insurer provided the insured a defense under
a reservation of rights.

Helena M. Martin was
injured when Hermond A. Mabry shot her four times using two
pistols while the parties were at Mabry's residence. Martin
notified State Farm Fire & Casualty Insurance Company (State
Farm), Mabry's homeowner's insurance carrier, of the event. State
Farm issued reservation of rights letters to Mabry and Martin,
asserting that insurance coverage might not be available due to
the intentional act exclusion in the homeowner's policy.

Martin filed a
motion for judgment against Mabry seeking recovery of $125,000
for injuries resulting from the shooting. In her pleadings,
Martin alleged that the shootings were the result of negligence
on the part of Mabry. After Martin filed her lawsuit, State Farm
sent a second reservation of rights letter to Mabry and a
reservation of rights letter to counsel for Martin. State Farm
retained an attorney to provide legal representation for Mabry.

State Farm,
represented by another attorney, filed a motion for declaratory
judgment to determine whether the intentional act exclusion in
Mabry's policy applied to exclude coverage for Mabry's acts.
Prior to resolution of the declaratory judgment proceeding,
Mabry, Martin, and their attorneys agreed to the entry of a
consent judgment against Mabry for $95,000.
Martin subsequently filed an answer in the declaratory judgment
proceeding asserting that the doctrine of collateral estoppel
precluded State Farm from litigating whether Mabry's acts were
negligent or intentional. Martin maintained that entry of the
consent order "on the pleadings," as recited in the
order, established that Mabry's acts were negligent as alleged in
the motion for judgment in the tort action.

Following an oretenus hearing and post-trial memoranda,
the trial court issued an opinion letter in which it determined
that State Farm was estopped from litigating whether Mabry's
actions in shooting Martin were negligent or intentional. The
trial court based its opinion on "the public policy grounds
expressed by the Virginia Supreme Court in State Farm
v. Wright, 173 Va. 261 (1939), and the estoppel
effect of a consent judgment expressed by the Virginia Supreme
Court in Culpeper Nat'l Bank v. Morris,
168 Va. 379, 385 (1937)." A final order was entered on
February 26, 1997, declaring that Mabry was entitled to coverage
under the State Farm Policy for the claims made against him by
Martin, and that State Farm was obligated to pay the judgment
rendered in the tort action in favor of Martin. We awarded State
Farm an appeal.

In its appeal, State
Farm argues that the trial court's decision improperly applied
the doctrine of collateral estoppel to preclude State Farm from
arguing in the declaratory judgment action that Mabry's actions
were intentional. Mabry and Martin reply that entry of the
consent judgment "on the pleadings" collaterally
estopped State Farm from relitigating whether Mabry negligently
or intentionally fired the shots that injured Martin.

We agree with State
Farm that collateral estoppel is not applicable in this case. One
of the elements of collateral estoppel is that the parties, or
their privies, must be the same in both the prior and subsequent
actions. Angstadt v. Atlantic Mut. Ins. Co.,
249 Va. 444, 446, 457 S.E.2d 86, 87 (1995). State Farm was not a
party in the tort litigation; therefore, this element of
collateral estoppel could only be met if the requisite privity
existed between it and Mabry.

Privity requires
that a party's interest be "so identical" with another
"that he represents the same legal right." Nero
v. Ferris, 222 Va. 807, 813, 284 S.E.2d 828, 831
(1981). Whether privity exists "requires a careful
examination of the circumstances of each case." Angstadt,
249 Va. at 447, 457 S.E.2d at 87. In this case, State Farm
reserved its right to challenge coverage under the policy based
on the nature of Mabry's acts. By so doing, State Farm
established that its position diverged from that of its insured
on this issue and that the interests of State Farm and Mabry with
regard to coverage were adverse, not identical.

This result was
foreshadowed by our discussion in Reisen v. Aetna
Life and Casualty Co., 225 Va. 327, 302 S.E.2d 529
(1983). In Reisen, we held that a
declaratory judgment proceeding to determine coverage under an
insurance policy could be brought by an insurer while the
underlying tort litigation was pending, even if the ultimate
factual issue in determining coverage was also at issue in the
tort litigation. In the course of the opinion, we stated that
"because of the likelihood that the insurer, after judgment
in the tort action, would be entitled to litigate the very same
coverage question it sought to raise before trial," the
declaratory judgment proceeding declaring the parties' rights in
advance was proper. Id. at 336, 302
S.E.2d at 534. This statement would be in error if the insurer
was collaterally estopped from raising the factual issue
addressed in the tort litigation in the subsequent proceeding
determining coverage.

We also conclude
that none of the other forms of estoppel noted by the trial court
operate here to preclude State Farm from pursuing its declaratory
judgment proceeding. Under principles of estoppel and waiver,
providing the insured a legal defense generally makes the insurer
liable for amounts recovered against the insured because the
insurer's actions indicate that the policy coverage applies, and,
therefore, the insurer is estopped from subsequently seeking to
avoid liability under the policy. Cooper v. Employers
Mut. Liability Ins. Co. of Wisconsin, 199 Va. 908,
916, 103 S.E.2d 210, 216 (1958); 14 George J. Couch, Cyclopedia
of Insurance Law ? 51:239 (Mark S. Rhodes ed.,
2d ed. 1982).

If an insurer
provides a reservation of rights, however, the insurer "is
not deemed to have waived, nor be estopped to set up, the defense
of lack of coverage" because of its participation in the
tort litigation. Norman v. Ins. Co. of N. America,
218 Va. 718, 726, 239 S.E.2d 902, 907 (1978). As the trial court
acknowledged, State Farm provided Mabry a defense under a
reservation of its right to later assert its defenses to coverage
under the policy, and, thus, these principles of estoppel and
waiver are inapplicable.

Finally, the trial
court referred to an "estoppel" based on its view that
actions taken by State Farm in the conduct of the tort litigation
provided the insurer with "its day in court," and,
therefore, State Farm was not entitled to another opportunity to
try its case on the merits, citing State Farm Mutual
Automobile Insurance Co. v. Wright, 173 Va. 261, 3
S.E.2d 187 (1939).

However, here State
Farm did not have "its day in court" in the tort
proceeding. SeeFarm Bureau
Mut. Auto. Ins. Co. v. Hammer, 177 F.2d 793, 799-800
(4th Cir. 1949). State Farm was not
a party to the tort litigation and, therefore, could not
independently assert its position on the nature of Mabry's acts
in that proceeding. Nor could it assert its position in
conjunction with providing a defense to its insured. The attorney
employed by the insurer to defend the insured "is bound by
the same high standards which govern all attorneys, and owes the
insured the same duty as if he were privately retained by the
insured." Norman, 218 Va. at 727,
239 S.E.2d at 907. To comply with this duty in the tort
litigation, Mabry's attorney could not argue that Mabry's acts
were intentional because such an argument could expose Mabry to
punitive damages and would not be in his best interest. Thus, the
declaratory judgment proceeding to determine the issue of policy
coverage was State Farm's first opportunity to assert its
coverage defense and to try its case on the merits.

In the instant case,
State Farm sent reservation of rights letters to its insured,
Mabry, and to Martin when it was initially informed of Martin's
claim. Reservation of rights letters were again sent to Mabry and
to Martin's counsel when the tort litigation was initiated. Under
these circumstances, neither waiver, estoppel, nor collateral
estoppel precluded State Farm from raising its coverage defense,
specifically the question whether Mabry shot Martin intentionally
or negligently.

Accordingly, we will
reverse the judgment of the trial court and remand the case for
further proceedings.

Reversed and
remanded.

FOOTNOTES:

[1] In Norman v.
Insurance Co. of North America, 218 Va. 718, 725,
239 S.E.2d 902, 906 (1978), we stated that the judgment entered
in the tort litigation holding the insured's actions to be
intentional "constitutes a collateral estoppel" of the
insured's action against the insurer in which the insured
asserted his actions were "accidental." However, we did
not examine the elements of collateral estoppel and specifically
did not discuss privity. Accordingly, Norman
does not provide binding precedent for the principle that
collateral estoppel would apply to insurers in the circumstances
of the instant case.